What is a grey market?
The grey market is the mediator market where buyers and sellers sell securities and commodities through unofficial distribution channels. The grey market is not illegal and is distinctive from the black market, where the products or transactions are made by escaping the law and regulations. A grey market offers buyers and sellers lower prices, less regulation, or additional profit. It also offers new shares even before they are officially listed on a stock exchange.
Explanation of Grey Market
A grey market is a market where unofficial or unregulated sellers, brokers, or traders deal in securities that are not listed or have been suspended from official exchanges. It is also called a gray, middle, or parallel market. It involves trading in securities that are about to be released or have been halted from trading.
Before an IPO or initial public offering, some issuers of securities or underwriters may sell a portion of the shares to high-net-worth individuals (HNIs) or qualified institutional investors in a grey market.I.e., they can ensure market share demand during the IPO and attract more retail investors.
The price at which these securities are sold in a grey market is called the grey market premium or GMP. It is the amount that a broker, issuer, or underwriter charges to investors in unregulated markets. Investors may buy securities in a grey market IPO because they expect high demand for the company's shares, trust the company's reputation, or the market sentiment influences them.
Some investors also use the grey market IPO and market pricing to decide whether to invest in a company's IPO. They can use the grey market price to predict the listing price of the shares and securities and estimate their profits and losses.
However, trading in securities in a grey market also involves risks and uncertainties due to market volatility or other factors. A grey market IPO can face both bullish or bearish market conditions.
In a grey market, the transactions in securities are legally binding, but they are settled only when the official trading begins, and the shares are listed.